Child Tax Deductions & Credits

Child tax deductions & credits

Federal Child Tax Credit

Working families will receive automatic monthly payments starting July 2021 for the Federal Child Tax Credit program as a part of the American Rescue Plan. The per child maximum will increase from $2,000 per child to a maximum of $3,600 per child under the age of 6 years old, along with an increase to the child age limit from 16 to 17 years old. Most families can expect a monthly payment, but to confirm you qualify and how much you will receive, visit Whitehouse.gov and IRS.gov.

State Child Tax Credit

A few states offer a state-level credit similar to the federal child credit, but it’s best to check each state at Tax Credits for Working Families.

Federal Child & Dependent Care Credit

The Child and Dependent Care Credit (CDCC) provides a tax credit for taxpayers who have paid for qualifying dependent care expenses for a qualified child up to age 14 or a disabled dependent of any age. The tax credit will provide up to 35 percent of qualifying expenses up to $3,000 for one child/dependent or up to $6,000 for two or more children or dependents.

State Child & Dependent Care Credit

Some states have child and dependent care credits, which may be partially or fully refundable. Check to see if your state offers this additional tax credit at Tax Credits for Working Families.

You might ask…. What’s the difference between Dependent Care FSA and CDCC?

You might ask … what’s the difference between a Dependent Care FSA vs. the CDCC? The IRS sets the same eligibility requirements for the CDCC as for the Dependent Care FSA, so the same expenses qualify. However, the tax savings are calculated differently. One or a combination of both tax programs may be more advantageous based on your income level. For example, prior to the new Dependent Care FSA annual election increase for 2021, some families may have chosen to enroll in a Dependent Care FSA plan at the $5,000 maximum annual election and take a $1,000 Dependent and Child Care Credit on their annual tax form. We recommend you consult your tax advisor to determine the best tax strategy for your family situation.

What’s the difference between a tax deduction and a tax credit?

A tax credit reduces the tax you owe, and the amount of the tax credit is subtracted from your tax liability. A tax deduction reduces your taxable income amount which may positively impact your taxable income bracket.

Tax credits and deductions may vary year to year, and its important to consult with your tax advisor to determine what credits are best based on your income level.

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